Oil Refinery
Isla Oil Refinery PDVSA terminal in Willemstad on the island of Curacao. Image Credit: REUTERS

Oil fell for a third day on a challenged Chinese demand outlook and after an industry report pointed to rising US inventories.

West Texas Intermediate sank toward $88 a barrel after sliding 4 per cent over the first two days of the week. Swelling virus outbreaks in China show the strain the Covid Zero strategy is facing, with even harsh lockdowns and mass testing failing to bring them under control.

In the capital, Beijing, cases hit the highest in more than five months, with 78 new infections reported for Wednesday.

In the US, the industry-funded American Petroleum Institute (API) reported oil inventories increased by 5.61 million barrels last week, according to people familiar with the figures, which also showed higher gasoline stockpiles. Official data from the Energy Information Administration (EIA) follow later Wednesday.

Crude rebounded in October after the Organization of Petroleum Exporting Countries and its allies agreed to cut supplies, while tighter European Union curbs on Russian oil flows next month amid the war in Ukraine could also add upward price pressure.

Despite the recent bout of weakness in futures prices, Dated Brent — the world's most important physical oil price — rose above $100 a barrel this week for the first time since August.

"A fresh surge in China's Covid cases further sparked concerns on how soon China will part ways with its Zero Covid policy," said Charu Chanana, market strategist at Saxo Capital Markets Pte.

"While China's virus restrictions, along with a large build in US oil inventories, are weighing on prices, there still remains structural supply concerns which are supportive instead."

Traders were also tracking results of the US midterm elections. A change in the balance of power in the Senate and House of Representatives could derail President Joe Biden's legislative agenda and impact the greenback, with a potential knock-on for crude and other commodities.

Separately, the US has cut its forecast for 2023 oil output, the latest sign that world crude markets can't rely on American shale fields to ramp up supply quickly enough to reduce high prices. Output next year is estimated at 12.31 million barrels a day, according to a report from the EIA released Tuesday.